For a biotech investor, sometimes an overreaction is the best type of reaction. It’s often an opportunity to pick up an exposure at discount, ahead of markets rebalancing as some degree of sense takes hold of sentiment, as opposed to emotional trigger pulling.
That is exactly what we’re seeing in Novan Inc (NASDAQ:NOVN) right now. At last Thursday’s close, the company was trading for a little over $18.7 a share. By Friday morning, this had dipped to less than four dollars a share – a nearly 80% decline. The drive behind the decline? A data release relating to the company’s lead asset, an acne drug called SB204. The data was mixed, as we will get to in a little more detail shortly, but the response was far from mixed. Many media outlets are reporting that the decline is a so-called “implosion” for the company, and – by proxy – insinuating that there is no chance of a gap close for the stock.
As mentioned, it is an acne drug that has caused this situation, and the data released relates to two separate phase 3 trials. The company was hoping that these two trials would underpin a new drug application (NDA) with the FDA in support of the drug’s approval in the US. Data from earlier studies of SB204 suggested strong efficacy, and the tolerability profile of the drug (something that – in acne medication – can be a real issue in many instances) looked strong.
In one of the phase 3 studies, the drug hit all three of its primary endpoints, demonstrating statistical significance against said endpoints across the board. In the second, however, SB204 only demonstrated statistical significance in one of the three same endpoints, and while clinical benefit was inferred across the other two, a statistical analysis of the data suggested irrelevance.
Acne drugs, as with many skin condition related drugs, generally require two phase 3 trials to underpin approval. As such, if Novan is going to get this one approved, chances are the company will have to undertake another phase 3 to derive the data it needs to support the one that succeeded. That’s the sticking point for investors. Another phase 3 will be costly, and when current cash on hand is brought into the picture, chances are Novan will need to raise before the end of the year if it is to carry out another study. The cost of doing this has suggested to many that Novan will drop the study, and therein lies the driver behind the decline.
We don’t think it’s as cut and dry as this, however. Statistical significance, while widely accepted, is subjective, and with four out of six endpoints across the trials proving statistically significant, we think there is real value in the company continuing development of the drug, and that management will feel the same.
Further, this was not Novan’s only asset. The company has a genital warts drug and an onychomycosis drug in phase 2 right now, both of which have demonstrated positive results to date. Even if management doesn’t drop the acne asset, and we don’t think it will, the lower pipeline is worth more than markets are currently giving the company credit for.
So what is next? Novan hasn’t really addressed the data as yet, other than to say it is looking into the results and will make a decision shortly. We expect management to hold a conference call at some point during early February to bring investors up to speed, and that this conference call will outline a forward development plan for SB204. Sure, it is probably going to include some degree of dilution, but even with a capital raise, there’s a decent chunk of upside available on a sentiment shift.
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Disclosure: We have no position in NOVN and have not been compensated for this article.